RBA meeting preview: 5 questions ahead of this month’s meeting

When is the RBA meeting next?

The RBA will meet for the first time in 2022 on Tuesday the 1st of February, 2022.

5 key questions for this RBA meeting:

Will this meeting be a big mea culpa?

The RBA is copping a lot of flak from commentators for its failure to forecast inflation and provide appropriate guidance to the markets. Despite signs of elevated inflation across the globe, the RBA was steadfast in 2021 that inflation would moderate, and the conditions would not be met to see interest rate hikes in 2022. Although the central bank did temper its guidance that rates would not increase until 2024 at the end of last year, it discounted the possibility that hikes could come this year. It’s very likely the RBA will walk back this assessment of the economy and policy and deliver what will be in effect a big mea culpa.

Will the RBA end QE as expected?

The RBA has long flagged that it would be reassessing its quantitative easing program at this meeting. At it’s last meeting in December, the central bank outlined several scenarios by which this could be done: a gradual tapering starting in February and ending in May; a reduction in purchases with another review in May; and a complete cessation in February. Given the data and the current value of the Australian Dollar, the latter of which was the reason for the policies implementation to begin with, it’s considered most likely that the RBA will announce an end quantitative easing entirely from February.

What changes will the RBA make to its forecasts?

Having botched its forecasts for much of 2021, with the February Statement on Monetary Policy coming Friday, market participants will be looking for a new set of economic projections at this meeting. The RBA’s November SOMP forecast an unemployment rate of 4.75% and trimmed mean CPI figure of 2.25%, which quite drastically missed the 4.2% jobless rate and 2.6% CPI for the year ending 2021. These numbers will have to marked higher this time around, with the implication being that the central bank has now all but met its policy mandate.

How will the RBA change its guidance?

With QE likely to end, its economic projections revised, and global interest rates rising as other central banks move, the RBA will almost certainly have to changes it forward guidance. Considering its failure to forecast accurately, the RBA faces a small crisis of credibility right now, and will probably bring forward significantly its guidance for moves in the cash rate in the future. Right now, interest rate markets are implying 4 hikes in 2022, with the first expected to come in May. Although the RBA is unlikely to fall in line with these very hawkish expectations, its likely it will throw the door open to rate rises in the year ahead.

How could the AUD/USD react to the RBA meeting?

Policy is only a part of the story for the RBA at the moment, with volatility and weaker sentiment in global markets pushing the AUD/USD lower. The pair has plumbed the 69-handle in recent days, as it remains firmly entrenched in a primary downtrend, and clinging onto technical support around 0.6990. Although there are signs of a bullish divergence between price and the RSI on the weekly chart, momentum appears skewed to the downside for now. If support around 0.6990 breaks, it may open a further drop for the AUD/USD to 0.6780. The next key level of resistance right now can be found around 0.7100.